The Netherlands: Economic figures about lockdown period show severeness of corona crisis

In April, during which the country was in its most stringent lockdown-phase, domestic consumption fell by 17.4% y/y (figure 1), the largest contraction measuredd[1] by Statistics Netherlands. This historically low consumption figure was partly due to consumers not being able to spend as restaurants and cafés were closed and events were cancelled. But also retail stores – which were allowed to remain open- saw their turnover decline at a rate of 3.5% y/y in April. This indicates that the consumption decline was not only because of closed businesses. Consumers were more cautious because of the fear to catch the coronavirus but also because of their increased worries about their future financial situation.

The retail stores saw their turnover increase again in May with 5.9% y/y (figure 2), often an indication for an increase in consumption and consumer confidence seems to have reached its lowest limit, although still remaining at a low level. Al in all we expect a limit recovery for household consumption in the coming quarters.

[1] Statistics Netherlands did not record any consumption figures in the period between 1940-1948

The unemployment rate moved up again in May to a still modest 3.6% (figure 2). It appears that the support package (which runs until October) prevented many forced dismissals for the time being. Nevertheless, we expect unemployment to rise further among employees with flexible contracts in the coming months, likely followed by a further rise among open-term contract employees after these support measures expire. This will hinder the recovery of consumption.

After two years of roughly remaining at the same level, manufacturing production fell in April by 11% y/y (figure 5). The last time it had dropped this much was in 2009. The Dutch manufacturing industries did not have to close down as in many other countries, but they are quite interlinked with industries across the world. Accordingly, the drop in production is a reflection of the Dutch industry’s connection with the global supply chain.

As world trade is slowing down, we expect exports recovery to be defined (table 1) and not a lot of space to make up for this production loss. Also producer confidence and the PMI are still indicating a further decrease in production, but they are slightly less negative: producer confidence rose again from 25.1 in May to 15.1 in June and the purchase managers index (PMI) increased to 45.2 in June. We think that the Dutch manufacturing industry will decline by 10% y/y in 2020 (value added).

With substantial support packages the government attempted to limit job and income losses and keep businesses afloat. This has had a crucial positive impact in the first phase of the crisis, but comes at a cost. Governmental debt slightly rose with 0.8 percentage point to 49.5% in the first quarter of 2020, after having continuously declined since approximately 2016 (figure 6). A further deterioration in public finances is in the cards, as the expected costs of the first and second support packages come to 36.4 billion euro. Moreover, declining (tax) receipts and higher public spending in the social domain beyond the support packages will also weigh on the EMU balance, which therefore is set to fall substantially. Nevertheless, the Netherlands’ public finances are in a strong position to weather the Covid-19 storm.

Approximately two months ago the first ‘intelligent lockdown’ rules, instated since mid-March, were eliminated. Keeping 1.5 meter of distance quickly became a key element in Dutch society. Restaurant and cafés where allowed to open their doors, as long as they complied with certain social-distancing rules. However, some decided to close again after having difficulties abiding by these rules. Also various cultural institutions, museums and cinemas could reopen, if they adhered to these new regulations.

On June 24th, the government has announced that more restrictions will be lifted according to the previously defined path, and even a bit faster. Keeping 1.5 meter distance and working from home where possible will remain key elements of the anti-Covid-19 strategy though. For now, the new announcements therefore do not change our forecast for the Netherlands. We expect GDP to decrease at a rate of 5.7% in 2020, showing that the Netherlands has been hit hard by the corona crisis - albeit less so than other countries in the Eurozone. However, we expect that the Dutch economic recovery will be relatively limited next year, because of the exposure to falling foreign demand and a sharp rise in unemployment in the coming quarters. Obviously, the uncertainty around this forecast is large.

In case of a new virus-outbreak the Netherlands might go back to a mild lockdown and the economic situation could be worse than we have pencilled in.